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Australia cuts iron ore price forecasts as output surges

The price of iron ore has slumped by 30 per cent this year, hitting a low of $US89 a ton on June 16. Photo: Nick Cubbin

Australia, the world's largest iron ore exporter, cut its price estimates for this year and 2015, predicting that surging output will boost competition among low-cost shippers and force suppliers in China to close.

The raw material will average about $US105 a ton this year from $US110 forecast in March, the Canberra-based Bureau of Resources and Energy Economics said Wednesday. Prices may average about $US97 a ton in 2015 from $US103 estimated in March, it said.

Producers including BHP Billiton and Fortescue Metals Group are expanding supplies in Australia, betting that increased volumes from their low-cost mines will more than offset declining prices. Iron ore entered into a bear market in March and fell to the lowest since 2012 this month. The commodity faces a global surplus until at least 2016 that will pressure prices, according to Credit Suisse Group AG.

"Lower iron ore prices are unlikely to affect the production rates of most iron ore mines in the Pilbara, which have some of the lowest production costs in the world," the bureau said, referring to the main mining region in Australia. "At current prices a large proportion of China's domestic production is still assessed as loss-making."

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Shipments from Australia will reach a record 680 million tons this year and climb to 764 million tons next year, the bureau said. Previously, the bureau estimated exports in 2014 at 687 million tons. The agency's price forecasts refer to spot ore with 62 per cent content free-on-board Australia.

Iron ore with 62 per cent content delivered to Tianjin port fell 0.1 per cent to $US93.30 a dry ton yesterday, according to The Steel Index. Prices slumped 30 per cent this year, dropping to $US89 on June 16, the lowest since September 2012.

If the same reforms in China that have pushed unprofitable steel mills to close are also applied to iron ore miners, it is likely that a number will close before the end of 2014, the bureau said. While this loss in supply should provide some price support later this year, it is unlikely to fully offset the substantial increase from Australia, it said.

Iron ore may be supported as higher-cost Chinese mines close amid the slump in prices. The commodity may find a so-called floor at $US90 a ton, a level that may put more than a quarter of Chinese capacity out of business and spur production cuts at mines outside the country, according to Citigroup Inc.

Iron ore is expected to average $US100 a ton this year, dropping to $US89 in 2015 and $US87 in 2016, Credit Suisse said in a report on June 23. Global seaborne supply will increase 9 per cent to 1.37 billion tons this year as Australian exports expand 18 per cent to 685 million tons, it said.